Background

Pakistan currently finds itself at the heart of two major gas pipeline projects, both conceived in the early 1990s. One involves import of at least 750 mcfd (million cubic feet per day) of gas from Iran Pars gasfield to the southern Pakistan. The other one envisages about 3.2 billion cubic feet of natural gas per day from Turkmenistan Daulatabad fields to Afghanistan, Pakistan and India through a 1,640 km pipeline (also called TAPI). Both are critical to the growing energy needs of south Asia, particularly of energy-deficient Pakistan and India but progress on both seems hostage to multiple competing interests.

Old rivalry over the disputed Himalayan region of Kashmir and a contest for influence in neighboring Afghanistan hardly helps both south Asian neighbours to close ranks for a joint and mutually beneficial strategy on both projects. Iran, on the other hand, has its own problems and vice versa. Both Teheran and Washington are locked in a perennial acrimony ´ ranging from allegations of Iranian support for radical, anti-US Islamist groups to its pursuit of nuclear weapons -. This acrimonious Washington-Teheran relationship does not augur well for both Iran and Pakistan to mobilize funding for the project. India, on the other hand, has recently struck a bilateral price deal with Turkmenistan, thus upsetting Pakistan.

Status of Iran-Pakistan Pipeline

The discovery of gas reserves in Sui in Balochistan in the 1952 helped Pakistan use gas as a primary means of energy security. Gas now accounts for more than 43 percent of the country total energy generation.

But Pakistan gas supplies now seem to stagnate at around 4 billion cubic feet per day (bcfd), while the demand has risen to 6.5 bcfd, expected to rise to 8 bcfd in three years.

Iran has an estimated 982 trillion cubic feet (TCF) or 27.8 trillion cubic meters (TCM) of proven natural gas reserves which are the world second largest after Russia but has been finding difficult to develop them because of the sanctions imposed by the United States and the United Nations for its nuclear programme. The project idea came to light in 1989 and has since been under discussions among a number of stakeholders ´ buyers and sellers and prospective investors.

Iran and Pakistan remained engaged in talks over the project since early 1990 which lost warmth in the aftermath of a few significant gas discoveries in Sindh. The two sides later also roped in India in their talks as gas demand in Pakistan increased.

The three nations kept on talking the gas supply project for long, at times marred by differences over pricing mechanism and security concerns. As India signed a civil nuclear deal with the United States, Iran and Pakistan agreed to have Japanese Crude Cocktail formula under which price of gas delivered at Pak-Iran border would be around $9 per MMBTU (million British Thermal Unit) at a crude oil price of $90 a barrel. Compared with lower average domestic gas prices of about $3.5 per MMBTU, the imported gas would only be used for generating about 5000mw of electricity.

Under the gas sales and purchase agreement, the two countries could have review of gas price before the gas flows actually start. Teheran had hoped to get the strategically important project going by the end of 2014 but Pakistani authorities have started approaching their Iranian counterparts to amend the agreement under which the Iranian gas should start flowing into Pakistan by the end of 2014.

Formal talks between Iran and Pakistan on the issue are expected to start soon. Iran dream of piping natural gas from its South Pars gas fields to Pakistan, however, may not come true at least until the end of 2014 because Pakistan, embroiled in an economic crisis and beset by an insecure political environment, is seeking a six-month grace period beyond Dec 31, 2014.

Islamabad desires an extension in the cut-off date to skip a penalty clause under which it is mandatory on Pakistan to start purchasing gas by the cut-off date or risk paying the price of stipulated amount of gas in penalty. While Iran has completed 80 percent of the construction work of the pipeline on its side, Pakistani part of project is mired in internal controversies. Under the agreement, 750 mmcfd of gas per day will be piped to Pakistan, which could be raised to the tune of 3.2 BCFD if the project was extended to China.

Preparation of technical studies related to route survey, the front-end engineering design etc, was the first snag to hit the project. The Sui Southern and Sui Northern Gas Pipeline ´ (SSGCL) and (SNGPL) — which jointly possess of the largest gas transmission systems in the world, were forced to stay out of the race to pave the way for foreign firms to step in.

The SSGCL and SNGCL offered to complete the physical survey of the pipeline in 8-10 months but the petroleum ministry wanted to award the contract for survey and Front End Engineering Design (FEED) to a joint venture of the National Engineering Services of Pakistan and a local representative of ILF of Germany at a contract price of $55 million. However, the security agencies expressed concerns over the proposed aerial survey by foreign consultants from the strategic Gawadar port to Multan and Nawabshah, fearing it could compromise national interests.

The contract signing for route survey and FEED was also delayed over taxation matters. The delay in the project raised worries among Pakistani authorities that Iran could invoke penalty clause of the agreement,starting with about $200 million by December this year.

‘The real worry is that Iran may not restrict itself to just penalty; it may demand the construction cost of the pipeline from South Pars field to Sistan,’ a Pakistani official said. The completion of the route survey and FEED study, which should have been ready by the end of 2011, is a pre-requisite to hold an investor conference and start construction of 785 kilometer piece of the pipeline from Iran border to Nawabshah in Sindh at an estimated cost of upto 1.5 billion dollars.

The ILF had offered to complete the study (survey plus feed) in 18 months but was asked to reduce the time to 12 months to skip penalty. The company is reported to have completed first round of surveys and would be filing initial maps to the government in about two weeks.

Interestingly, while the World Bank and the Asian Development Bank are interested to provide finances for the project, Russian and Chinese companies are also competing for the construction contract of the strategically-important pipeline. Given Pakistan close ties with China, Islamabad may eventually award the engineering, procurement and construction (EPC) contract to Beijing. In top level contacts with the Pakistani officials, the Chinese leadership is reported to have expressed serious interest in the project.

Pakistani Minister for Water and Power Naveed Qamar is reported to have discussed the issue during his recent visit to China to attend a meeting of the joint economic commission. Such an equation could also evoke China interest in seeking extension of the pipeline to its territory at a later stage, or at the very least would be interested to set up industrial units around Gawadar. Nevertheless, senior executives of the Russian energy giant ´ Gazprom ´ have been visiting Islamabad quite often to bid for the project and has already submitted formal expression of interest.

The SSGC and SNGPL are also in the run for the project to improve their profile as international pipeline engineering firms. During the rule of former military President Pervez Musharraf that ended in August 2008, Pakistan had proposed China as a replacement for Indian, which pulled out of the project after signing a civilian nuclear energy cooperation deal with the United States.

While Pakistan has been inclined to include China in the project, it was also interested to woo Gazprom because of Russia vast experience in pipelines and had invited it in 2010 to participate in the project. Pakistan would prefer to fund the project through public-private partnership in an attempt to ensure at least a part of the return on financing to remain within the country. Pakistan and Iran signed the gas sale purchase agreement in June 2010. A segmented approach has been adopted for project whereby both countries would be responsible for building and operating the pipeline transportation network in their respective territories. Around 62 percent of the Iranian natural gas reserves are located in non-associated fields, and have not been fully developed.

Major natural gas fields include South and North Pars, Tabnak, and Kangan. Pars in the south is Iran most significant gas field, estimated to have 450 TCF proven natural gas reserves. Pakistan efforts to meet gas shortages have not been successful in view of bureaucratic wrangling, manipulation and political inaction.

A plan envisaging import of 500MMCFD of liquefied natural gas (LNG) has been stymied by judicial disputes over changes in the bidding process.

TAPI

Gas pricing issues are also hampering the gigantic Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline project because Turkmenistan wants separate price agreements with each country while buyer countries seek a uniform gas rate.

Status of TAPI

The 1,640 km TAPI project is proposed to bring 3.2 billion cubic feet of natural gas per day from Turkmenistan Daulatabd fields to Afghanistan, Pakistan and India. Out of this, Pakistan will get 1.365 billion cubic feet of gas per day, India 1.365 bfcd and Afghanistan 0.5 bcfd.

The project came into limelight when Pakistan and Turkmenistan signed a memorandum of understanding in March 1995, with Argentinean energy firm Bridas Corporation as the main sponsor. The US based UNOCAL and Saudi Delta Corporation offered themselves as alternative consortium and constituted a new firm Centgas consortium. Unocal executives had been engaged with Taliban to facilitate the pipeline to pass through Afghanistan. In the aftermath of attacks on US embassies in Dar es Salaam(Tanzania) and Nairobi (Kenya) some African countries in August 1998 , the Unocal pulled out of the talks in 1998.

The project talks revived when in December 2002 heads of Turkmenistan, Afghanistan and Pakistan signed a fresh memorandum of understanding and allowed Asian Development Bank to sponsor a detailed feasibility study. Conducted through the British Penspen, the ADB submitted the feasibility study. The United States also supported the project as an alternative to the Iranian gas pipeline as India joined talks initially as an observer and then as a formal participating buyer.

In April 2008, Pakistan, India and Afghanistan signed a framework agreement to buy natural gas from Turkmenistan, followed by an inter-governmental agreement in December 2010 in Ashgabat, the Turkmen capital. ADB has funded the feasibility study of the project but with little success in sorting out the multi-lateral pricing issues.

The participating countries are also undecided about issue of ¿lane packed gas’ ´ a term used for pipeline that stays put in the pipeline and undelivered ´ as to who should pick up its cost.

Turkmenistan is of the view that buyer countries always pay for lane packed gas as per international best practices but buyer countries want the seller to share the price of the lane packed gas. Nevertheless, authorities are hopeful of signing a multiparty Gas Sales Purchase Agreement (GSPA) much before December 2011.

Dealing a blow to Pakistan, India has struck a bilateral gas price deal with Turkmenistan under TAPI gas pipeline project thus foiling Pakistan endeavours for a uniform gas price. This has literally put the finalisation of the Gas Sales Price Agreement (GSPA) in jeopardy, according to officials at the ministry of petroleum and natural resources in Islamabad.

‘Yes, we have come to know that Turkmenistan and India have finalised the separate gas price instead of going for uniform price for all three buyer countries. So we have also told Turkmenistan in plain worlds that Pakistan will match the lowest gas price between the seller and buyer country,’ officials said.

Earlier Pakistan, Afghanistan and India, the three buyer countries, had sought a uniform price of gas while Turkmenistan wanted a bilateral arrangement (separate prices) for every country. ‘It seems Turkmenistan is not inclined to selling gas to Pakistan at the price that it is charging India, officials say.

Pakistan and Turkmenistan were earlier scheduled to hold crucial talks on GSPA at Ashkhabad on August 15-16, but on account of the visit of Dr Asim Hussain, federal minister of petroleum and natural resources to Poland, the Ashkhabad talks are now expected to be held in September. During the talks, Pakistan is likely to express its ‘grave concern on the separate gas price deal with India,’ said officials. Pakistan is of the view that a separate tariff would have huge political repercussions for each buyer country.

The Asian Development Bank (ADB) has already expressed willingness to sponsor Pakistan equity in the TAPI project, Pakistani officials say the ADB offer to sponsor the major chunk of Pakistan equity in the project will provide massive relief to the country.

Sources privy to the Manila talks, held from May 30 to June 3 (2011) said the talks were stalemated on separate tariff issue as Afghanistan, Pakistan and India argued that a separate tariff would have huge political repercussions for each buyer country.

Another issue still awaiting an amicable, multilateral solution is the sulphur content in the gas from Turkmenistan. Pakistani and Indian officials, according to Pakistani official sources, are not yet on the same page on this issue. India desired that sulphur content should not be more than 0.25 percent, whereas Pakistan has decided not to side with India because of its separate gas deal with Turkmenistan. However, Turkmenistan said it would have to build a de-sulphurisation plant, which would increase prices for all buyer countries.

Future Prospects

As of now, the squabbling over pricing formula, the Iran-US tiff and the perennial Pak-India conflict of interest, the future of the two pipelines still seems to hang in balance. Yet, if all the stake-holders can close ranks, remove some of the major bilateral or trilateral frictions and address mutual reservations, the Iran-Pakistan (and potentially India) pipeline as well as the TAPI can indeed emerge as regional security and peace stabilizing factors ´ pipelines for peace and stability so to say. The primary challenge for all the stake-holders, however, is how to decouple these commercial ventures from their competing political interests. If the United States removed its overt and covert opposition to the Iran-Pakistan pipeline, that could serve as a huge confidence-building measure for Pakistan, which at the moment is not only struggling to fend-off security threats and overcome economic challenges, but is also desperately looking for alternative sources of energy.

(Contributed by Mr.Khaleeq Kayani. Mr. Kayani is a special correspondent on economic affairs for the prestigious daily Dawn)